With conversations swirling around the costs of bills and essentials rising for all, the certainty of fixed mortgage payments for the time being has been cited as a saving grace for mortgage holders.
However, with shared ownership tenants and leaseholders having to factor in regularly rising costs to rent and service charge, such owners are left exposed to other housing expenses.
Case study
Kenneth O’Keefe, a shared ownership resident of a property owned by Ballymore, has seen his service charge payment rise from £3,036 a year in 2012 to £5,014.84 in 2022.
To date, he has paid £38,595.64 towards the service charge, which excludes the car park, concierge and leisure facilities.
“It’s as good as a second mortgage whereby the service change is affecting the value of the property,” he told Mortgage Solutions.
Ballymore calculates its service charge based on a property’s square footage and the services provided at the development.
Increases to its service charge are capped at five per cent for private leaseholders as Ballymore committed to a service charge contribution for one year, while those under affordable housing schemes such as shared ownership will see their charges set by the housing provider.
O’Keefe fully staircased in 2014, two years after taking out his shared ownership mortgage.
When contacted by Mortgage Solutions, Ballymore did not explain why O’Keefe’s service charge had risen by £1,978.84 in total while Thames Valley and Notting Hill housing associations – which both manage shared ownership tenancies at the property – declined to comment.
O’Keefe said Ballymore initially calculated its service charge on a property’s square footage alone and said this would not exceed £2.97 per square foot.
“So for me, I would have been planning about four grand a year for service charge, but no way what I’ve been planning for four or five grand a year.
“You think when you go into a solicitor’s office and sign the paperwork that things are nailed down, but it actually is probably one of the most fluid systems,” he said.
O’Keefe said he wanted to move out of London and buy another property but was unsure whether he would be able to sell his home. While he had not tried to market his home, he said other private leaseholders in his building were struggling to sell.
An adviser’s duty of care
Tony Harker, director at Censeo Financial said service charges were not limited to shared ownership tenants alone but to leaseholders too. He said all advisers had a duty of care to look at future costs when assessing a client’s suitability for a mortgage.
“In the case of shared ownership, we’ve also got to look at the rent and the service charge increases,” he added.
As Censeo Financial specialises in shared ownership, Harker said its advisers knew the propositions “back to front”. The firm sits on most housing association panels and uses the Homes England affordability calculator for shared ownership to assess a buyer’s ability to afford and sustain a mortgage.
Harker said: “When we’re looking at mortgage advice, we review their existing bank statements, and we also get them to do a budget planner. Then we review the income and expenditure to ensure that they’ve got an element of contingency in the funding for any future rises, because it’s not just rent and service charges.
“We’ve seen cost of living rises in utilities and everything. So, we’ve always had to do it. But it’s a difficult one, because every property development will have a different service charge.”
Service charge calculations can vary from scheme to scheme, some require all tenants to pay the same price, while others base it on tenancy or the size of a property. Increases to service charge are also calculated differently and any costs incurred on the development each year will impact the increase or decrease in the service charge for the following year.
Harker said this is where the responsibility of a solicitor came in, as they would often be able to provide a detailed breakdown of service charges and what future rent rises could be.
He added: “What nobody can do is say what the service charges are going to rise to, because that depends on the costs incurred in the building each year. All we do know is that service charges are calculated in the first year of a new build, and it’s an estimated cost based on similar schemes.
“Then they are audited every year and the service charge rises or falls according to the cost of the building.”
Harker said it was down to a solicitor to also inform shared ownership buyers of any potential rises in costs and make sure that “they’re aware of all the implications of what the lease requires and the obligations of what they’re actually paying into.”
Speaking on O’Keefe’s rises in service charge payments, Harker said one would hope that a borrower would see a rise in their salary over that time but said all expenses could be uncertain, adding: “Who would have ever thought we would face these costs of utility bills?”
Harker said shared ownership could still be a viable option compared to the prospect of surging rents in the private rental sector. He said like any other costs associated with owning or renting a home, people had to put money aside and prepare for changes.
A leasehold issue
O’Keefe said he went through “strenuous” financial checks when taking out his shared ownership mortgage which gave him the confidence that he could take on the financial burden.
O’Keefe said he did not have a problem with the concept of paying service charge but said a structure similar to the escalating charges he has seen would make it hard for people who might see a drop in income due to retirement, switching to part-time or flexible work or other changes in lifestyle.
He said mortgage repayments were “only the tip of the iceberg” when it came to associated costs, and said he felt advisers needed to make this more explicit.
O’Keefe recognised that this was not just a shared ownership issue but a leasehold one, and called for further reforms to help existing leaseholders, adding: “At this point, my only saving grace is legislation.”
